Weighing benefits of Twitter deal with S.F.

Tech firm got big tax break to stay in S.F., so what's in it for the city?

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October 26, 2013
| Updated: October 30, 2013 6:12pm

A sign is posted outside of the Twitter headquarters on October 25, 2013 in San Francisco, California.

Photo By Liz Hafalia/The Chronicle

Sean Garrett (left) of Twitter, is given a tour of the central Market St. area with mayor Ed Lee in San Francisco, Calif., on Wednesday, April 6, 2011.

Photo By David Paul Morris/Bloomberg

The Twitter Inc. logo and signage is displayed on the facade of the company's headquarters in San Francisco, California, U.S., on Friday, Sept. 13, 2013. Twitter Inc.'s market debut will be the most anticipated initial public offering since Facebook Inc. listed last year, and the microblogging service is making sure to avoid some of its rival's pitfalls. Photographer: David Paul Morris/Bloomberg

Photo By Michael Macor/The Chronicle

The historic San Francisco Mart building on Market Street takes up the entire South side of the street between 9th and 10th streets, would be the new home of Twitter. The San Francisco Board of Supervisors approved today, a payroll expense tax exclusion to businesses moving into the central Market Street and Tenderloin area by a vote of 8-3 on Tuesday Apr. 5, 2011.

San Francisco Mayor Ed Lee, center, tours the rooftop garden of Twitter's new offices on Thursday, May 10, 2012. One of Mayor Lee's first policy decisions was pushing a tax break for the downtrodden Mid-Market area to keep Twitter from leaving the city. (Sarah Rice / Special to The Chronicle)

Photo By Michael Short/Special to the Chronicle

Nirmam Sandesara commutes from Sunnyvale on Caltrain and regularly takes the 83X Mid Market Express Bus between the Caltrain station and the Twitter offices on Market in San Francisco, CA. Thursday August 9th, 2012

Two days each week, a dozen or so attorneys arrive on the fifth floor of the Superior Court to provide free legal advice to low-income San Franciscans facing eviction.

The twist on a recent Wednesday afternoon was that two of the lawyers volunteering for the Bar Association's Eviction Defense Project worked for Twitter, the company most frequently singled-out for the skyrocketing rents forcing some residents from the city.

Their appearance in the "Housing Hallway," where pro bono attorneys square off with lawyers for landlords, is one way Twitter is trying to hold up its end of a bargain with San Francisco.

It's well known that the company agreed to stay in the city in exchange for a payroll tax break that could add up to tens of millions in savings over six years. Less discussed is that the community benefit agreement included a series of looser - and harder to quantify - commitments, like preserving affordable housing, supporting the arts and providing legal assistance.

The question is: On the whole, who's getting the better end of the deal? Twitter and its employees, or San Francisco and its residents?

It's an especially timely topic as the company gears up for its initial public offering, an event that will mint an untold number of millionaires - and, at the same time, underline the vast amount of cash bypassing city coffers as a result of the tax deal.The precise amount will depend on blanks that have yet to be filled in, including how many options and restricted stock units employees sell, at what prices and when.

But an analysis by The Chronicle and accounting firm James J. McHale, CPA of San Francisco found that if all employees unload their shares at the midpoint of the offering price range, the lost revenue to the city could add up to $34 million.

That's on top of the $22 million that the Board of Supervisors' budget analyst said would be lost in payroll taxes over the life of the six-year deal.

Shifting the tax

Ted Egan, chief economist in the controller's office, points out that San Francisco wouldn't have received any money at all, if Twitter had followed through on its threat to leave the city and a deal wasn't worked out. Only their negotiators know how sincere the threat was, but it is true that San Francisco at the time was the only California city with a payroll tax, which served as a strong disincentive for companies planning to go public to stay here. Things like stock options and restricted stock units, which can add up to billions of dollars, were previously treated as taxable compensation when they were exercised and sold.

Last year, voters approved a shift from the payroll tax to a gross receipts tax, which will be phased in beginning in 2014. But the initial solution in 2011 was to create a partial exemption to the payroll tax for companies that located in the long-dilapidated Mid-Market district. Essentially it let companies cap payroll taxes at the amount they were paying when they finalized the agreement. Egan said the deal at least preserved that base revenue, which will add up to nearly $10 million over six years. It also helped keep jobs in the city, with Twitter employing 2,300 people.

In addition, taking advantage of the tax breaks requires complying with annual community benefit agreements. Twitter has steadily checked off its commitments, completing 18 of 25 so far this year, according to a city progress report earlier this month.

By being one of the first companies to take advantage of the Mid-Market tax break, Twitter also served as a kind of anchor tenant that helped attract others. The district has since become a tech cluster, with other companies, including Yammer and Zendesk, taking advantage of the tax deal, and some, like Square and Dolby, moving in without the incentives. The influx sparked a broader revitalization of the neighborhood: Retail storefront vacancy has dropped from 30 to 22 percent, sales taxes climbed by 21 percent and 4,500 housing units are in the pipeline for the neighborhood.

"It's safe to say the city will benefit from tens of millions of dollars in additional property and sales tax revenue," said Christine Falvey, spokeswoman for Mayor Ed Lee, who strongly pushed the Mid-Market tax break.

Gabriel Metcalf, executive director of the San Francisco Planning and Urban Research Association, said it's a rare example of tax incentives working as intended. He attributes it to a timely confluence of factors, including Twitter's move, the Mid-Market tax break, the tech boom and the northward migration of Silicon Valley into San Francisco.

"Some of it was good policy and some of it was good luck," he said.

A housing crisis

But at what cost?

As the dollars flow into San Francisco, many people are being forced out. Metcalf has said that the injection of new wealth shifted San Francisco into a phase of "hyper gentrification."

The median monthly rent in San Francisco hit $3,398 in the third quarter, up 21 percent from the previous year, according to Lovely, a rental marketplace. The biggest increases were in economically disadvantaged neighborhoods, like Hunter's Point, where rents shot up 46 percent. The Civic Center area around Twitter's headquarters saw housing rents leap 33 percent.

Residents worry that skyrocketing rents are pricing out all but the tech industry's nouveau riche, forcing out the motley groups of artists, do-gooders, immigrants and zealots who make the city a special place.

It's unfair to single out Twitter for blame. It's a consequence of the broader tech boom as well as restrictive housing development policies that date back decades. But it's also indisputable that it's happening now and that Twitter, with hundreds of well-compensated employees, has contributed to the problem. Twitter's IPO may or may not have a measurable impact on this trend in a city of 826,000, but it certainly won't help to have new millionaires pushing up housing prices or converting apartments into condominiums.

He says the company has complied with the deal as written, but argues that the city should be pushing the company to do more to alleviate gentrification. "Volunteering is great, but we have a housing crisis in San Francisco right now," he said.

In the 12-month period that ended March 1, 1,757 eviction notices were filed in San Francisco, up 26 percent from the year-ago period, according to the San Francisco Rent Board. And that provides only a glimpse of what's under way in San Francisco, since the city doesn't require landlords to report eviction notices for the most common reason: nonpayment of rent.

Ted Gullickson, director of the San Francisco Tenants Union, said companies like Twitter should have to mitigate impacts on the housing market in the same way developers are required to offset environmental impacts before being allowed to build - especially if they're offered tax breaks worth tens of millions of dollars.

"We knew full well what the impact was going to be when you have companies attracting wealthy workers from across the country," he said. "They should have done something to minimize it."

Balancing justice

But others believe that Twitter and the Mid-Market tax break have already done more than could reasonably be expected for the neighborhood and city.

In adhering to the community benefit agreement, Twitter has, among other things, donated $75,000 to nonprofit groups in the Central Market and Tenderloin neighborhoods, provided 26 tutors to the Tenderloin Tech Lab, and contributed more than 33 hours to the Bar Association's eviction and homeless programs.

It's clear that the Twitter attorneys who showed up at Superior Court that afternoon weren't just checking off some compliance box.

Benjamin Lee, legal director at the company, worked for the Legal Aid Society in New York earlier in his career. Megan Yip, a user safety policy specialist, spent two-and-a-half years at Legal Aid of Marin focused on elder and housing law. Both stressed that the civil court system is inherently unfair for the poor, especially in housing cases where landlords have greater financial and legal resources.

"In some sense, it's about trying to balance those scales of justice, so the little guy has a shot," Lee said.

-- The tax break will cost far more than the city estimated, an analysis shows. A15